Netflix users on Verizon and AT&T get raw deal, have little reason for hope

Customers are the victim of stalled negotiations between ISPs and Netflix.

"Why is Netflix so unreliable?" That's one of the most common questions asked by Internet users today.

But that question gets asked by customers of some Internet service providers (ISPs) a lot more than customers of others. Netflix's February rankings show that Google Fiber's average Netflix speed of 3.74Mbps was more than twice as high as Comcast, AT&T, and Verizon, which are the first, second, and fourth biggest broadband providers in the country. Cablevision, Cox, Suddenlink, and Charter beat the biggest ISPs in the national speed rankings too. RCN, a smaller carrier in the Northeast, last year outperformed all opponents in a speed test of just the Boston area.

Further Reading

The trend has been a downward one for months on Verizon, Comcast, and AT&T, yet only customers of Comcast have reason to hope it might improve. That's because Netflix reluctantly agreed to pay Comcast for a direct connection to its network. Already, Netflix streaming on Comcast improved slightly in February and should continue to get better as more traffic goes over the direct connection between Netflix and Comcast.

But what about Netflix customers stuck with Verizon or AT&T? There's nothing to do but wait.

For all its complaints about the country's lack of net neutrality rules, Netflix has shown that it's willing to pay what it calls ISP "tolls" to secure a better experience for users. But so far it's only struck a deal with Comcast, and that may be because Comcast wanted to avoid extra scrutiny as it tries to convince the US government that it should be able to purchase Time Warner Cable.

Wedbush Securities wrote that Netflix will have a harder time making deals with ISPs other than Comcast.

"We think that Comcast likely sought as much as $0.01/GB transmitted, but [we] think that the companies settled for a fraction of that amount," the financial services and investment firm said in a research note on February 24. "[W]e believe that Netflix’s 33 million US streaming customers consume an average of 100GB of data per month, suggesting that Netflix’s throughput across all US broadband is 3.3 billion GB of data per month. At $0.01 per GB, Netflix would be required to pay approximately $400 million per year, over two-thirds of 2014 consensus operating profit. We think that Comcast was motivated to get a deal in place prior to its merger, but do not expect Verizon, AT&T, Charter, Cablevision, or any other US broadband provider to be similarly motivated to strike a deal."

Wedbush estimated that Netflix would pay Comcast $25 million to $50 million a year for three to five years, but analyst Dan Rayburn puts the estimate at around $12 million a year instead and disputes Wedburn's methodology, noting that the 33 million customers are across all ISPs, not just Comcast. "Comcast has previously stated that less than .1% of their total revenue came from these kind of commercial interconnect relationships in 2013," Rayburn wrote. "That means that for all of last year, Comcast got paid between $30M-$60M, which included all of the similar deals they have with Google, AOL and others."

Netflix and Comcast haven't revealed the deal size.

Verizon and AT&T would rather customers purchase their own video products instead of Netflix's, such as Verizon's Redbox Instant streaming service. Verizon CEO Lowell McAdam has said he's confident about getting payments from Netflix, but that the companies have already been talking "for about a year" without an agreement. AT&T also says it is negotiating with Netflix. AT&T and Verizon spokespeople had no updates on negotiations Friday.

Cablevision, it should be noted, probably isn't asking Netflix for payment since it already partnered with Netflix to improve video quality.

The numbers don't look good

The chart above shows average performance of all Netflix streams on each ISP's network. The numbers don't show what percentage of customers on each network get acceptable quality, but the downward trends have coincided with business disputes involving the ISPs, Netflix, and transit providers like Cogent and Level 3, which distribute Netflix traffic.

Verizon continued months of declining Netflix performance in February, while AT&T achieved a small uptick, but not enough to wipe out losses from previous months. Comcast's Netflix average went from 1.51Mbps to 1.68Mbps in February, still below Verizon FiOS, but the Netflix/Comcast deal only kicked in toward the end of the month.

Netflix, AT&T, and Verizon all appear to be digging in for battle. Netflix acknowledged that it's likely to keep paying ISPs, but begged the Federal Communications Commission to prevent ISPs from demanding those fees, saying they should "provide sufficient access to their network without charge."

While Netflix paid Comcast for a peering connection at the edge of Comcast's network, it has refused to pay for priority access over a consumer ISP's last mile, the path that leads directly to subscribers' homes. Instead, it offers to place its own video storage boxes in ISP data centers to bring content closer to consumers, but the biggest ISPs have refused to host Netflix equipment without payment.

AT&T last week asked the FCC to explicitly allow payments from Web services to ISPs for priority access over the last mile, claiming that it would lower customers' bills if it was able to recoup costs from Netflix and other companies.

Is $49 billion enough to upgrade a network?

AT&T said it would be too expensive to upgrade its network without help from Netflix and other bandwidth-heavy services. In other words, Netflix has to pay or consumers will either face worse performance or get higher bills from AT&T.

"To say that regulators must decide between increasing costs on companies like Netflix or raising prices on consumers is to present a false choice," Fung wrote. "Rising demand is a fact of the industry. Meeting that demand is what network operators are built to do."

That's not how AT&T Senior VP Jim Cicconi sees it. He called Netflix's demands "arrogant," writing that "we can all accept the fact that business service costs are ultimately borne by consumers." AT&T shouldn't have to pay to improve its own infrastructure, Cicconi argued.

"If there’s a cost of delivering [Netflix CEO Reed] Hastings’ movies at the quality level he desires‚ and there is—then it should be borne by Netflix and recovered in the price of its service. That’s how every other form of commerce works in our country," Cicconi wrote.

Verizon weighed in with the FCC this week, arguing that the commission shouldn't regulate peering and other Internet interconnection agreements. Unchecked negotiations have "provided incentives for all parties to seek out efficient ways to deliver and exchange traffic and encouraged the investments needed to allow Internet networks to keep pace with consumer demand," Verizon wrote.

With lack of competition, few incentives to solve problems

AT&T and Verizon charge their customers for the ability to access the Internet with a certain level of bandwidth, despite not having enough infrastructure in place to provide acceptable quality for all the Internet services their customers are attempting to use.

This would be a lot less likely to happen if it were easier for customers to switch Internet providers. As of Dec. 2012, 29 percent of US households lived in census tracts with one or zero providers offering fixed broadband service of at least 6Mbps, according to FCC data. That's barely above the 5Mbps minimum recommended to play Netflix video in high-definition. Bandwidth is shared across a household, so downloading a file and playing high quality video simultaneously may be challenging with that amount of bandwidth.

In areas where competition thrives, consumers get lower prices and better results. RCN, which is challenging the big ISPs in Boston, Chicago, New York City, Philadelphia, and Washington, DC, doesn't have the market power to demand payments from Netflix. Instead, RCN worked with Netflix to make videos stream in better quality for their joint customers, even though RCN had to take on extra costs to maintain Netflix equipment inside its own facilities.

Google Fiber's presence in a few communities has forced incumbents to lower prices or offer better services, but only in those areas where customers have a choice. If customers had choices everywhere, perhaps ISPs would try to differentiate themselves by offering better Netflix performance.

Further Reading

Comcast has tried to promote its Time Warner Cable deal by arguing that it won't reduce competition in any individual city or town, because Comcast and Time Warner don't bother to compete against each other anywhere in the country. In short, many US residents stick with Internet service providers they hate because the have no choice, and that gives ISPs a lot of leverage in negotiations with Netflix.

We probably shouldn't feel sorry for Netflix itself. The company makes billions of dollars in revenue and turns a profit from fees paid by tens of millions of subscribers.

But there are reasons to feel sorry for customers of Verizon and AT&T (and surely other ISPs) who are barely able to use a product they've paid for because of business conflicts they might not even be aware of. US residents subscribe to Internet service expecting the ability to access all the services on the Internet. Today, there is not enough competition and no law on the books to ensure that expectation is met.

Promoted Comments

That's not how AT&T Senior VP Jim Cicconi sees it. He called Netflix's demands "arrogant," writing that "we can all accept the fact that business service costs are ultimately borne by consumers." AT&T shouldn't have to pay to improve its own infrastructure, Cicconi argued.

Quite right, quite right!

Why, I have half a mind to follow his lead and refuse to buy gas for my car in order to get to my work. Since my work is demanding I come to their facilities, obviously they need to bear the cost of making sure my car can make it there every day by buying my gasoline.

If ISPs, like Verizon and AT&T, want to do business in the modern world, they're going to have upgrade their infrastructure on their own dime. It is fallacy for them to expect to reap all the benefits (revenue), but bear none of the responsibility (upgrades). If this means they must shift a few billion dollars from Marketing or Data Collection/Retention into infrastructure improvements, that is their price to pay. The consumer already pays.

As Internet Service Providers, they need to do one thing and do it well: provide access services. And since they aren't providing "service" well to begin with, I doubt they're truly capable of juggling service and [their own] competing content with any semblance of efficiency.

Where is the competition? Where I live, if one ISP started acting like this, everyone would jump ship to another.

I live in a smallish town and have at least 30 different ISP's to choose from. Currently on an 80mpbs fibre line with no D/L caps and no Netflix throttling. It costs the equivalent of $60 a month but between my flatmate and I, that's fine.

18 months ago, it was only a 40mbps line.....they gave everyone a free upgrade to 80mbps because.....competition. There's a good chance It's going up to 120mbps soonish. For the same price i'm paying now.

"There's nothing to do but wait." I disagree. If my ISP were responsible for poor performance by a legitimate service, I'd call their help desk every single day. Whatever they said, short of making it work as expected, I'd insist on speaking to a supervisor. Write letters to your local newspaper, your state's public service commission, and the FCC - any regulatory body the ISP has to report to, whether it's related specifically to Internet service or not. Write to the president of the company and members of the board of directors (find the information on their web site). And most of all, get your whole community and anyone else you can think of to do the same.